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When it comes to investing, many people like to keep things simple. Like, really simple.

Always eager to oblige, the folks in the fund industry have responded by creating a product that is so easy to understand anyone with even a nodding acquaintance with investing can grasp the concept. It’s when you get into the details that things get complicated.

They’re called “target date” funds and most are specifically designed for people who are saving for retirement. You just choose the fund that most closely matches your target retirement year, invest all your money in it, and forget it. When the time comes to stop work, you’ll have a nice nest egg and a portfolio that is tailored to your age at the time. At least that’s the theory.

While retirement planning is the main attraction of these funds, a few are designed for college savings, notably the Education series from RBC Global Asset Management.

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Virtually all are funds of funds, also known as portfolio funds. They are composed of a selection of funds from the sponsoring company. For example, the Fidelity ClearPath Portfolios are made up of 10 funds from that organization, ranging in risk from Fidelity Canadian Bond to Fidelity Small Cap America.

The portfolios are automatically rebalanced as you age (or as the college start date nears) so as to reduce risk. In the early years, the emphasis will be heavily on higher-risk equity funds but as you approach retirement the balance gradually shifts to lower-risk fixed income and money market funds.

One target date family I looked at recently showed an asset mix of 92 per cent stocks and only 8 per cent fixed income in its 2050 portfolio. With retirement about 35 years away, the thinking is that there is ample time to ride out any stock market crash, such as we experienced in 2008-09. Conversely, the 2020 portfolio, which is designed for those who are only five years from retirement, contains only 45 per cent equities with the rest of the assets in cash and bonds. This mix greatly reduces the risk if markets tumble in the years just before retirement, although it doesn’t eliminate it completely.

So does the concept work? It’s really too soon to say with certainty. Although the idea has been around since the early 1990s, most of the funds available today have a track record of less than 10 years. To make things more difficult, sponsoring companies have different ideas of what the appropriate asset mix should be at each stage.

To illustrate, the BlackRock CDN Lifepath 2020 Index Fund offers a global portfolio with a mix of 56 per cent stocks and 44 per cent bonds. By contrast, the DynamicEdge 2020 Class Portfolio is more conservative with 59 per cent of the assets in bonds and cash and only 41 per cent in equity funds. The BlackRock asset mix has generated higher profits with a three-year average annual compound rate of return of 10.9 per cent to Aug. 31 compared to just 6.1 per cent for the Dynamic entry. But investors who are only five years from retirement might feel more comfortable with reduced stock market exposure.

If you’re considering investing some of your retirement savings in these funds, here’s what I suggest.

Look at the track record. Compare the fund’s average annual returns to the average for its category. It should be at least as good.

Check out the sponsoring company. It should be a firm you are familiar with and have confidence in.

Examine the underlying funds. Some target date portfolios consist exclusively of mutual funds while others offer a mix of mutual funds and ETFs. The only pure ETFs available in Canada are the three Corporate Bond Target Maturity funds from BMO. However, several target date ETFs can be purchased on the New York Stock Exchange including several iShares entries.

Ask about the asset allocation. As we’ve seen, some of these funds take a more aggressive approach than others. They will have more profit potential when stock markets are strong but that comes at the price of greater downside risk. If that makes you uncomfortable, choose a more conservative fund.

As I said at the outset, the concept of target date funds is easy to understand. It’s choosing the right one that can be rather tricky.

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